Darden Restaurants, Inc. — Q3 FY2022 Form 10-Q
Business context and period. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse and The Capital Grille. This unaudited report covers the three and nine months ended February 27, 2022; comparatives are the periods ended February 28, 2021. The prior-year periods were more affected by COVID-19 restrictions. Omicron disrupted restaurant operations in Q3, particularly in January 2022, while most restaurants had few, if any, restrictions by the filing date.
Financial performance
| Metric | Q3 FY2022 | Nine months FY2022 |
|---|---|---|
| Sales | $2.449 billion, up 41.3% | $7.027 billion, up 42.9% |
| Same-restaurant sales growth | 38.1% combined | 39.7% combined |
| Operating income | $301.0 million; 12.3% of sales | $824.7 million; 11.7% of sales |
| Net earnings from continuing operations | $247.9 million | $673.0 million |
| Diluted EPS from continuing operations | $1.93 | $5.17 |
| Operating cash flow from continuing operations | Not provided for the quarter | $916.5 million |
Q3 sales gains reflected same-restaurant sales growth and 33 net new company-owned restaurants since Q3 FY2021. Segment profit margins were 21.0% at Olive Garden, 18.2% at LongHorn Steakhouse, 22.9% at Fine Dining and 13.8% at Other Business. Olive Garden’s margin fell 220 basis points year over year; margins rose in the other three segments.
Costs, cash flow and financial position
- Q3 food and beverage costs rose to 30.7% of sales from 28.8%, with management citing inflation and unfavorable menu mix, partly offset by pricing. Restaurant labor was 32.6% of sales, reflecting inflation and lower productivity, partly offset by sales leverage. Total operating costs were 87.7% of sales versus 91.5%.
- Nine-month operating cash flow was $916.5 million, versus $746.0 million. Capital expenditures were $275.6 million, compared with $177.3 million. Financing cash outflow was $1.235 billion, including $426.2 million of dividends paid and $834.1 million of share repurchases.
- At February 27, cash and cash equivalents were $555.3 million, with another $51.5 million in restricted cash; current assets were $1.280 billion and current liabilities were $1.816 billion. Cash and cash equivalents had been $1.215 billion at May 30, 2021.
- Long-term debt was $916.4 million. Lease liabilities totaled $4.946 billion, including operating and finance leases. The company had no borrowings under its $1 billion revolving credit facility and reported compliance with its covenants.
Changes, outlook and key risks
Compared with the prior-year periods, sales and earnings increased substantially as business recovered from pandemic-related disruption. Diluted EPS from continuing operations increased from $0.98 to $1.93 for Q3 and from $2.00 to $5.17 for the nine-month period. The prior-year nine-month EPS included approximately $0.28 per share of corporate restructuring charges. The effective tax rate increased to 12.5% for Q3 and 13.1% for nine months, from 2.3% and 2.6%, respectively; Darden attributed the change principally to higher earnings and the effect of certain tax credits.
FY2022 outlook: Sales of $9.55–$9.62 billion, same-restaurant sales growth of 29%–30%, 35 net new restaurants and approximately $425 million of capital expenditures. These are forward-looking estimates, not guarantees.
Management identified inflation in food, labor and utilities, labor availability and productivity, supply interruptions, COVID-19 developments, consumer demand, competition, leases, food safety, cybersecurity, litigation and impairment of goodwill or other assets among relevant risks. Ordinary-course legal claims were not expected by management to have a material adverse effect. Standby letters of credit were $104.8 million; guarantees on assigned leases had a maximum potential future payment of $104.4 million. The company reported that impairment exceeding approximately $1.13 billion at quarter-end would have been required to breach its revolving-credit leverage limit, while noting seasonal sensitivity. A $1.10-per-share dividend was declared after quarter-end, payable May 2, 2022.
Important facts for investors to verify
- Whether the strong year-over-year sales comparison, which reflects a more pandemic-affected prior period, translates into sustained demand and growth.
- Whether menu pricing can offset food, labor and other cost inflation without weakening guest counts or margins.
- Execution of the FY2022 sales, restaurant-opening and capital-expenditure outlook, and the effects of staffing or supply constraints.
- Cash and liquidity after substantial share repurchases and dividends, together with debt, lease obligations and covenant headroom.
- The impact of COVID-19, legal claims, lease guarantees, derivative exposures and potential asset impairments; management’s outlook and risk disclosures are subject to uncertainty.